President Obama
released his Budget Proposal for FY 2014 on April 10. In it he proposes
cuts to both the Environmental Protection Agency’s (EPA) state
revolving loan funds (SRFs) and the Rural Utilities Service’s Rural
Water and Waste Disposal program. He also proposes changes to the tax
code that would affect water infrastructure funding.

For the SRFs, the
Budget proposes a combined $1.912 billion for Federal capitalization of
the SRFs, representing a reduction of $448.5 million (or 19 percent)
from the 2013 enacted level without factoring in FY 2013 sequestration
cuts. Assuming these cuts, this would be a reduction of $330.5 million
(or 15 percent). This is roughly equal to cuts proposed last year in the
president’s budget. According to the proposal, “The Budget also
proposes a gradual reduction to focus on communities most in need of
assistance, but will still allow the SRFs to finance approximately $6
billion in wastewater and drinking water infrastructure projects
annually…Going forward, EPA will work to target SRF assistance to
small and underserved communities with limited ability to repay
loans.”

For Rural Utilities
Service’s Rural Water and Waste Disposal program, the budget proposes
a combined $304 million for direct loans and grants for the program,
representing a reduction of $264.7 million – or 47 percent – from
the 2013 enacted level without factoring in FY 2013 sequestration cuts.
Assuming these cuts, this would be a reduction of $220.4 million, or 42
percent. This is considerably more than cuts proposed last year in the
president’s budget, which were only 12 percent. However, according to
the proposal, “Consistent loan performance and low interest rates have
made USDA’s rural water and wastewater direct loans less expensive to
administer and allows the Budget to propose $1.2 billion in loan level
from the $794 million level enacted in 2012. Higher loan levels at lower
interest rates means that less grant funding is needed to fund each
facility.”

For tax policy,
President Obama is again proposing to cap the value of interest earned
on municipal bonds at 28 percent for certain income earners. Under the
federal tax code, investors do not pay federal income tax on interest
earned from most bonds issued by state and local governments. This tax
exemption for municipal bond interest allows state and local governments
to receive a lower interest rate on their borrowing than they would if
their interest was taxable to investors. A recent report by the National
Association of Counties, National League of Cities, and U.S. Conference
of Mayors concludes that tax-exempt municipal bonds are the most
important tool in the
U.S.
for financing investment in schools, roads, water and sewer systems,
airports, bridges and other vital infrastructure. The study goes on to
explain that if the proposal to enact a tax-benefit cap of 28 percent
for certain taxpayers had been in effect during the last decade, it is
estimated that this would have cost states and localities an additional
$173 billion in interest expense for infrastructure projects financed
over the past ten year period.

On the positive
side, the president’s budget includes the removal of water and sewer
projects from the private activity bond volume cap, a provision that AGC
has been in favor of for many years. In the Treasury Dept.’s General
Explanations of the Administration’s Fiscal Year 2014 Revenue
Proposals (also known as the Greenbook), the administration notes “a
significant need for capital funding to upgrade the nation’s water and
wastewater infrastructure facilities” and that “removing the volume
cap on tax-exempt qualified private activity bonds for water and
wastewater infrastructure facilities would encourage additional needed
private investment and public-private partnerships in these
infrastructure facilities.” The industry estimates that this proposal
would generate an additional $2 to $5 billion annually in water
infrastructure funding. Read the full Treasury document here.